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world trade organisation

international organisation dealing with the global rules of trade between nations and ensuring that trades flows as smoothly, predictably and freely as possible


what are the aims of the WTO?

  • Trade without discrimination: all countries must subscribe to Most Favored Nation status - goods from all WTO nations are treated equally (tariffs are applied universally and foreign goods are treated the same as domestic goods)
  • Freer trade through negotiation: continuous negotiation so that trade policy changes are done by direct dealing and gradually so affected countries can prepare for adjustments
  • Predictability through binding and transparency: binding is the commitment among members to keep tariffs at or below certain rates which allows importers to assess markets accurately and open trade rules encourages more trade
  • Promoting fair competition: rules against dumping and intellectual property theft increases fair competition
  • Encouraging development: developing countries granted special trade concessions because assumes those industries need time and space to grow to competitiveness 


which functions does the WTO perform?

  • provide a forum for trade negotiation
  • execute WTO agreements
  • evaluate and rule on trade complaints by member nations
  • provide technical assistance to developing countries on trade issues
  • track changes in member trade policies


arguments in favor of the WTO

  • promotes peace by increasing trade relationships between countries
  • provides place to handle disputes constructively and encourages compromise
  • based on rules rather than power which can protect smaller, poorer partners in disputes
  • free trade cuts cost of living because production more efficient so prices lower
  • trade provides greater consumer choice and variety
  • trade boosts income for countries which can be spent on improving services and infrastructure
  • increases economic growth which can increase employment
  • encourages efficiency and simplicity for trade rules
  • shield countries from narrow interests like protectionism because must abide by rules


arguments against the WTO

  • negotiations favor rich countries which can afford large groups of trade negotiators
  • poor countries cannot afford trade representatives
  • tariff escalation not addressed: developing keep tariffs much high on semi-processed goods than on raw materials to keep out low-cost competition from LDC and increases risk of overspecialization for LDCs
  • rich country agricultural subsidies high so blocks developing world trade
  • protection of intellectual property rights prevents innovation from spreading to developing world
  • even though tariffs are dropped, rich countries can use other bureaucratic measures to keep goods out
  • does not protect rights of workers or environment


what are the levels of economic integration?

  • preferential trade agreement
  • free trade area
  • customs union
  • common market
  • economic and monetary union
  • complete economic integration


preferential trade agreement

two or more countries reduce or remove tariffs on particular goods or services produced in participating countries or make other agreements reducing the barriers to free trade between nations


free trade area

two or more nations make an agreement to completely eliminate tariffs on most goods and services traded between them


customs union

agreement between nations through which tariffs on all goods and services produced by member nations are traded tariff free which the member nations agree on common tariff rates on imports from all non-member counties


common market

goods and services are traded without tariffs and factors of production as well (labor, land, capital, entrepreneurship)


monetary union

common market in which member states also adopt a common currency managed by a single central bank


complete economic integration

member nations completely forego independence of both monetary and fiscal policies


advantages of economic integration

  • greater efficiency: resource allocation more efficient when goods produced in nation with lowest domestic opportunity cost
  • higher real incomes: cheaper imports lead to higher disposable incomes which improves quality of life and variety of goods available
  • larger export markets: broader consumer base allows industries to increase output and hire more workers


disadvantages of economic integration 

  • fall in employment in certain industries: increased operations from foreign producers may force some domestic firms to shut down
  • exploitation of workers: low-skilled labor is exploited in nations where producing that good is most productive
  • environmental effects: producers open factories in countries with lowest environmental standards
  • rising trade imbalances: can cause a nation's imports to rise faster than its exports


trade creation

free trade agreement shifts production of certain goods or services from a high-cost country to a low-cost country


trade diversion

  • formation of trading bloc leads to transfer of production of a good or services from a nation with a lower opportunity cost to one with a higher one
  • if eliminate tariffs on goods from less efficient nation, consumers will purchase more of those goods while the demand for those goods from a more efficient country falls